Buying Your Dream
by Jean Cameron-Smith
After hours, days or months of searching, you have finally found the home of your dreams . . .
Why Do You Need a Real Estate Agent?
- To facilitate communication to ensure that all goes smoothly
- To help navigate any potential minefields that may surface
- To provide representation and a voice in the process
STEP 1: Make an Offer
Your offer to buy the property will consist of:
- The total price you are offering
- The deposit you will put down when you sign the contract
- How much of the purchase price will be financed
- Your contingencies
- The date you would like to close
To help you determine if the listing price (what the Seller is asking — also called asking price) is justified, ask your Realtor to send you sold “Comps,” which is information on comparative –properties, that have already sold. Typically houses in Westchester sell close to the asking price but we are no longer in the Seller’s market of the last few years. Buyers now have more leverage although offers substantially below the asking price may not be taken seriously. Some buyers want to float low offers to see how the Seller will respond. If you choose to do this, the Seller may not counter, and you will have to increase your offer in order to engage in negotiations.
In determining price, you should be aware that if a property is well-priced for today’s market — which is determined by how it compares with recent sales — and the Seller is not under unusual pressure to sell, it may sell close to the asking price.
What is your offer dependent upon? For example: You agree to buy the house for a given sum but only if you are able to get a mortgage or only ifthe house passes a structural inspection, etc. If your deal falls through due to a contingency, your down payment should be returned.
Typical contingencies include:
Structural inspection (see Step 5 for information concerning inspections).If issues come up that the Buyer and Seller cannot agree upon, either party may back out. The Buyer cannot secure a loan. If you can’t borrow the necessary funds to finance the house, you may back out. Confirming the legal description of the house. If, for example, a house is listed as having four bedrooms, does the County Board of Health confirm that the septic system is designed for four bedrooms? Do you need to sell your home in order to buy the new one? Sellers are usually extremely hesitant to accept an offer contingent on the sale of your home unless it is already in contract.
From the Seller’s perspective, a contingency restricts your offer: something could come up that would allow you to withdraw your offer without incurring any negative consequences. As a result, the Seller knows he/she hasn’t really “sold” his property until the contingencies have been met. This may make your offer less attractive than an offer with no contingencies. Yet, contingencies are there to protect you. Discuss with your Realtor the impact of adding contingencies to your offer. If you decide to remove any of them, it is recommended that you consult your attorney (see Step 4 for information regarding hiring an attorney).
A contingency is met when confirming documentation is produced.
Choosing a Closing Date
Getting to the Closing, which is when Buyer, Seller, Bank, etc., and attorneys gather to sign documents, turn over money and finalize the sale, typically takes six to eight weeks in Westchester.
Faster closings can occur but are difficult to commit to. If either party wants a delayed closing, it should be part of the negotiation. A rarely used “time is of the essence” clause can be included in an offer if it is essential that the closing occur by a certain date. However, this is an onerous condition that the Seller’s attorney would likely advise against.
Any factors impacting either side’s ability to meet the closing date should be discussed at the time the offer is made. The closing date specified in the offer and, subsequently, on the contract is a target, not a hard and fast date. By convention, most attorneys give up to 30 days before or after the date on the contract as a grace period. The final closing date is determined by the attorneys based upon their clients’ needs and their own availability but only after the Bank (or Lender) has cleared the Mortgage to close.
Your Financial Terms
The down payment. What is the percentage of the purchase price you will put down in cash when you sign the contract? With the exception of the money you paid for any inspections, this is your first financial commitment toward the purchase of the property. Ten percent of the purchase price is the standard down payment but less can be negotiated.
This is the money you have “at risk.” If you have to pull out of the deal after the contract is signed for a reason not covered under the contingencies, you can loose the down payment.
Your personal check will accompany the signed contract back to the Seller’s attorney. This check will be cashed and remain in the Escrow Account of the Seller’s attorney so you need to have the down payment amount as available cash. If you are planning on selling stock or getting funds from a family member, you should have the money cleared already and in your account.
Source of Funds: Mortgage, Cash or Both?. To be sure the Buyer is in a position to actually buy the house, the Listing Agent will ask, “Where is your money coming from?”At this time you have to produce a Pre-Approval Letter from a lending institution, which can be a commercial bank such as Chase or Citibank, or a mortgage company such as New York Mortgage Co., Countrywide, etc. This letter specifies how much of a mortgage the lending institution believes you are qualified to receive based upon a credit check.
If you are ready to buy, make sure the pre-approval letter is strong, which means it is recent, written by a well-known lending institution and based on a credit check. Some agents prefer pre-approval letters from “brick and mortar” lenders rather than e-lenders. The name and a phone number of the person providing the letter gives the listing agent the ability to ask questions and may create greater confidence in your ability to qualify for the mortgage.
If your offer is not based upon the sale of a property such as your current home, a listing agent will ask that the offer and pre-approval letter both specify that you do not need to sell anything to get a mortgage.
If you are planning on using cash for your purchase, you may be asked to submit a bank statement or other proof of funds. In this event, make sure the account numbers are blacked out to protect your privacy.
Although the Seller will end up with the same amount of money at the closing regardless of where it comes from, having a substantial amount of cash for the purchase will make your offer more appealing to the S eller for one reason: they will have greater confidence that the deal will go forward.
Items to Clarify
Inclusion/exclusions. Review what is included and excluded from the sale with your agent. These items should be on the listing sheet but it is always wise to clarify. Generally, anything “attached” to the house is included unless it is specifically excluded. In Westchester, appliances are generally included. Items which cause the most confusion are second refrigerators or freezers, light fixtures, curtains, moveable sheds, etc.
STEP 2: Negotiate
You will typically do this through your Realtor. There is no standard negotiation. It can happen in hours or take months. It can be direct, easy and congenial.,, or not! In Westchester, it can typically be completed in a few days.
When the Buyer and Seller finally come to terms, everyone is anxious to go forward, and this is the most vulnerable period. The Buyer can walk away without any further out-of-pocket costs, and the Seller can decide not to sell or can even accept another Buyer’s offer. At this point, it is in everyone’s best interest to move forward quickly.
STEP 3: Congratulations!
You Have an Accepted Offer
Your agent just called with the good news. What does that really mean?
Your offer was accepted but until the contract is signed and delivered to the Seller’s attorney, neither party is legally bound. Even though you have an Accepted Offer, the listing agent will continue to show the property unless the owner specifically requests no more showings. The listing agent is legally obliged to present all offers to the seller.
Think of it as being engaged but not married. You are much closer to getting the home of your dreams than you were before your offer was accepted. In reality, many Realtors will not bring buyers to houses that have an Accepted Offer because they don’t want their clients to fall in love with an “engaged” house.
Your Realtor may have sent a written “Offer to Purchase” to the listing agent along with your original offer. This simple form outlines the terms of the offer and gives the name and address of the Buyer. Many listing agents will not negotiate without a written Offer to Purchase accompanied by a Pre-Approval Letter. Others will wait to see if the negotiation is proceeding before committing it to paper. This is likely to be the only written record of your offer at this stage and it probably will not reflect the final terms to which everyone will eventually agree. You can ask your agent to prepare an updated Offer to Purchase for your records.
At this stage you, the Buyer, may become over-confident that the deal is done, especially if “your” property has been on the market for some time. However, any Realtor can tell you about a strange phenomenon: For weeks no one is interested in a property. Then, as soon as an offer comes in, others follow on its heels. If your Realtor is encouraging you to speed up the process, it is to protect your interests. Another party can come along and you may end up in a bidding war.
As soon as you have an Accepted Offer, you should schedule any inspections (see Step 5 ) as soon as possible. Inspections are typically done within 48 hours of the Accepted Offer.
Inspections are expensive, anywhere from $400 to $1,500. If a Seller decides to accept another Buyer’s offer, he/she is not legally obliged to reimburse you for your expenses. However, on the basis of fairness, your agent should request that the Seller reimburse you for all or part of your inspection expenses.
Even if a slightly higher offer comes in, most listing agents will encourage their Sellers to stick with the original Buyer — “a bird in the hand” — unless the second offer is substantially more attractive. In any case, you should be given an opportunity to meet the new offer. Your agent can ask to see the other offer in writing, with names blocked out to give you assurance that the new offer is real.
STEP 4: Hiring an Attorney
In finding an attorney several things should be considered.
Does the attorney primarily do real estate? Real estate is like any specialization — while simple transactions may not require a lot of experience, when problems come up, you’ll be happy to have someone who’s been there before. Attorneys who are primarily litigators are often in court and may not have the office support to keep your deal moving forward.
Is the attorney local? Having an attorney with a good reputation can make your deal go smoother. A local attorney is more likely to know the ins and outs of how things are done in different villages and towns and already has working relationships with key parties. This can be especially helpful with issues relating to property management companies for co-ops and condos, building permits and Certificates of Occupancy (“C of 0” states that your municipality has approved any construction done to the property and therefore may legally be occupied). A local attorney may also be aware of issues pending before planning boards that could impact your property.
Your Realtor is usually the best source for attorney recommendations. You should be given the names of at least two or three attorneys, and ask why each is being recommended. Give them a call and do a quick phone interview. Their responsiveness in getting back to you will tell you something about how accessible they are. Ask about their fees. If you are both selling and buying, you may get a preferential “package” rate. You can also visit www.martindale.com.
STEP 5: Due Diligence
Even if you are represented by a Buyer’s agent — your Realtor will already have discussed this term and its implication — conducting your own due diligence on the property is critical. Your goal is to make sure you discover any significant problems prior to signing the contract. Before signing you have time to re-negotiate terms, back out of the contract or decide if the property is still worth it.
Confirm on-going costs
Ask your agent for the phone numbers of village and town tax assessor’s offices and confirm the tax information yourself. If building permits have recently been acquired for a renovation, ask how much this is likely to add to your tax bill when it is fully assessed.
In New York State, Sellers are required to provide information on utility costs. With home heating costs going through the roof, this is a cost you need to verify. Also take usage into consideration. If the current owner is single and travels a lot and you have a young child at home, your costs could be substantially higher.
If you are buying a condo or co-op, you need to talk to the managing agent of the property to confirm which, if any, utility costs are covered in common charges and ask if any special assessments or other increases are being discussed in the near future. You should also get the condo or co-op rules and regulations to be sure there are no surprises.
The Structural Inspection
You should always have an inspection done to assess the structural integrity of the house and to make sure everything is in working order. Even new houses should be inspected to make sure the builder didn’t cut corners.
If your Realtor recommends an inspector, ask about his/her qualifications. While your Realtor does have a vested interest in your deal going forward, most want a thorough inspection done, and they know who are the top-quality inspectors.
A good inspector is one who is thorough, knows how to separate important issues from minor maintenance items, communicates clearly and educates the Buyer. You should always be present for a home inspection. Have the inspector point out issues so you can see for yourself, and take notes.
Be aware that some inspectors may have a tendency to be more negative than necessary about a property — especially in the written report — to protect themselves from liability. In general, you will get their true opinion about the property during the inspection. A great resource to help you find a house inspector is the American Society of Home Inspectors at www.ashi.org.
The following are a few key items that may be included in the inspection:
Mold Testing. There is justifiably great concern about mold, especially for people with allergies or other health issues. Most of the conditions tested for during your inspection will have fairly clear results. For example, either a roof has a problem or has a condition that may turn into a problem or it is fine. Mold is different and harder to test and evaluate. There are many types of mold with a wide range of impact on people, ranging from nothing to quite serious. Discuss your concerns with your inspector and Realtor.
Radon Testing. Radon is a naturally occurring, colorless and odorless gas found in parts of Westchester and much of the eastern United States. When this gas is trapped in an enclosed area, becoming concentrated in high levels, it can cause health problems. In most residences the greatest concern with radon levels is in a finished, below-ground living space with less ventilation. If your property has a finished basement you will want to get a radon test to determine if the levels are high enough to warrant remediation (curing or reducing the problem). A radon test is not expensive and results are typically available in less than a week.
Water Testing. Water tests may be performed to determine the safety of potable (drinking and cooking) water. Even if water is provided by a municipal system — as opposed to a private well — older homes may have lead pipes, which can cause elevated lead levels. If this is the case, remediation is possible with the installation of an appropriate water filter, water treatment system or, as a more expensive solution, replacing the pipes.
If drinking water is obtained from a well, the Private Well-Water Testing Law mandates that the Seller have a comprehensive test performed at his or her expense. Your inspector should also test the flow rate to determine whether the well is giving enough water to support the home’s needs.
Septic Test. If the property has a septic system as opposed to a public sewer, you may want the inspector to run a dye test to determine if the system is performing properly. However, since some experts believe that the dye test is inconclusive, you can review records of the cleaning and discuss the condition of the system with the company that maintains it. If you have any reason to be concerned, a visual inspection by a septic company will give you the best information on its condition.
Testing for Wood-Destroying Insects. Most inspectors will look for the presence of termites and other wood-destroying insects while they are checking out the house, and any damage found should be identified in the structural inspection. Some inspectors are qualified to give you the certificate required by most lenders stating the home has been tested for wood-destroying insects. If the inspector is not certified, you’ll need a termite inspector to do a separate inspection. Be aware that trace evidence of very old termite infestation doesn’t necessarily mean there’s a current problem.
Lead Paint Testing. If you are buying a single-family house built before 1978, your Realtor will give you a government booklet outlining the dangers of lead paint poisoning. Discuss the need to test for the presence of lead paint with your inspector. Very few buyers in Westchester conduct lead paint tests since most houses have multiple layers of paint thought to encase the lead paint. However, your inspector will guide you in making the best decision for your circumstances.
Oil Tank Test. An oil tank test is essential if a tank is buried on the property. This is a technical area with high exposure to liability. Some oil tank inspectors can provide you with the type of test that will qualify for oil tank insurance. This is something to explore with your Realtor, inspector and attorney. If an oil tank test is required, you should try to get it scheduled at the same time as the home inspection.
After the Inspection
You’ve been inundated with information. Now what? Talk with your inspector and Realtor about the results of the inspections and tests.
In even the most perfect home, there is typically one or two issues a Buyer will raise after the inspections. Remember, if the home isn’t new, the condition probably has been factored into the price. However, everything should work! It’s not legitimate to raise issues about old appliances — unless they don’t work. It may be hard to get any concessions on a roof that is at the end of its days but isn’t leaking. Discuss your concerns with your agent.
Your Realtor will present a list of issues to the listing agent who will review them with the Seller. You may feel strongly that something needs to be replaced while the Seller thinks it is just fine. Many deals fall apart at this stage but if you act in good faith and are reasonable, your deal has a better chance of staying together.
STEP 6: Getting a Mortgage
Now it’s time to get into high gear and decide whom you want to use for your mortgage and start the application process.
Unless you are sure you know whom you want to go with, you should interview lenders. Understand the difference between mortgage bankers and mortgage brokers. Try to get references. Your Realtor should know two or three excellent lenders. However, if his/her agency has a companion mortgage business, he/she she may not be allowed to give you other names.
In your interviews make sure you get information on closing costs as well as rates. When you comparison-shop, compare apples to apples — make sure the closing costs include the same items, and check for any “hidden” fees. In truth, many closing costs are set by law and not negotiable but bank attorney fees and appraisal costs can vary.
Discuss different programs that fit your situation. A young, first-time Buyer going into a one-bedroom condo won’t fit the same mortgage as a family moving up from a starter house into one they plan to be in until they retire.
If you find a banker you like but his/her bank doesn’t have the best program, go back and ask if he/ she can meet the offer you received from a competitor. When you agree on a deal, ask your lender to send you a letter outlining the rate and terms you discussed.
STEP 7: Signing the Contract
After the inspection is finished, the listing agent will prepare a “Memorandum of Agreement,” a one-page document that outlines the terms agreed to and has the names and contact information of all parties. This information is used by the Seller’s attorney to prepare the contract. Many attorneys fax their proposed changes back and forth to the other attorney, hashing out differences without making multiple revisions in the final contract. During this time, they’ll consult with you on issues and progress.
When your attorney receives the contract, as agreed to by both parties, you’ll be asked to sign it and leave the down payment check. After the Seller signs, you are in “Conditional Contract.” This means that — excluding any contingencies — you have the house. You now have an executed contract to send to your lender in order to begin the steps toward securing a mortgage.
STEP 8: Letting the Lawyers & Bankers Do Their Jobs
During this period the Buyer’s lawyer is ordering Title Work, in which a title insurance company researches the ownership history of the property to ensure that the Seller has the legal right to sell it, resolving any outstanding issues about the property as well as following up with the lender to check on the progress of the mortgage application. The Seller’s attorney is making sure things are progressing as they should and responding to issues that have been identified. There are typically two areas to be addressed:
1) The Legal Side
2) Has the property passed its appraisal?
We are entering a market where bankers are becoming more cautious and appraisals are tougher. There can be several reasons why a property does not appraise, that it is deemed as not worth what the bank is asked to lend. The appraisal could be wrong. Dig to find out if there are other sold comps to support your price. Or, the price may not be supported through the appraisal but the house may have features, such as views, a specific location or a style of architecture that makes it worth the price to some buyers — like yourself.
Your options include going to another lender, getting a second appraisal or trying to re-negotiate the price.
Other legal matters include confirming the title to the property is clear and making sure all permits & Certificates of Occupancy.
3) The Credit Side
Have the Buyers qualified for the mortgage by providing acceptable documentation to the lender about their financial situation?
Some of the above steps can take several weeks — especially if issues emerge that must be resolved. When the bank has satisfied its credit review and has the appraisal, a commitment for the mortgage will be issued. At this point, the conditions and contingencies established in the contract will have been met. Now your deal is “pending” with an Unconditional Contract.
Communication is critical during this period. Here is where an attorney’s support staff lose’-meaning that all of its requirements have been satisfied and they are ready to schedule a closing.
Next, the three sets of attorneys — the bank’s, Seller’s and yours — schedule the closing date, time and place, typically in one of the attorney’s office.
STEP 9: Your Job
During this time you need to do the following:
- Prepare for your move.
- Insure you have the funds available so a certified check can be issued for the closing.
- Ensure that your mortgage commitment doesn’t expire before the closing.
Although it doesn’t happen often, at the last minute closing dates can change by a couple of days. It’s always a good idea to have an alternate plan for a place to stay if there is a delay. You also may inquire about the cost to extend an interest lock in the event of a delayed closing. (The bank will commit to or “lock in” an interest rate for only so long. When this commitment expires, you may not get the same rate.)
- Contact utilities to open accounts and transfer service into your name. If you’re from out of the area and unfamiliar, ask the realtor for help.
- Get homeowner’s insurance to provide the Certificate of Insurance required at the closing. Your Realtor can give you the names of insurance providers in the area. Give yourself a few days to do the research and paperwork. Questions like how close is the nearest fire hydrant and fire station may be asked.
As close to the closing as possible, you’ll want to do a walk-through with your Realtor. This is the final inspection of property to make sure any work the Seller agreed to do was done properly, and that it is still in the condition it was (or better) when you did the original structural inspection. (In cold weather, it’s critical to do the walk-through just before closing. You don’t want to do a walk-through on Monday, have the closing on Wednesday and discover the heat stopped working and the pipes are frozen.)
The property should be left “broom clean” as specified in the contract. This means garages, basements and attics are cleared out. Some homeowners think they are helping you by leaving old cans of paint and garden supplies. You may or not agree. You can ask your Realtor to clarify with the homeowner in advance how you want the property left.
During the walk-through you should turn on appliances, check for screens, make sure the toilets flush and that the plumbing works. Check for any items that were included on the listing sheet, like blinds, shades and lighting fixtures. A Seller might accidentally take something that was to be left.
Take a digital camera with you to the walk-through, and photograph any problems.
If there are any issues, your Realtor should contact your attorney. Typically, things are fine but often issues can be addressed by money left in an escrow account (money held aside) to cover any costs as determined by the attorneys and agreed to by the Seller and Buyer.
STEP 10: The Closing
While most people do come to their closings, you don’t actually have to show up. You may assign power of attorney to your lawyer or to someone with whom you are sharing the title, and he or she can sign your name and act in your stead.
However, you do have to have the money present at the closing. You’ll need a certified check for the amount you — not the bank — are paying. Don’t forget to allow time to have the certified check made out in the appropriate amount. There will be numerous personal checks for you to write as well. Your attorney will provide you with a final list of checks required no later than the day before. As you approach the closing ask your attorney for an approximation of funds you’ll need. You’ll be paying taxes, settling adjustments for pre-paid fuel, title insurance, attorney fees, etc.
If your funds are coming from the sale of another property, work out with your attorney exactly how the checks need to be made out. (These details may seem obvious but closings have been held up for hours when checks need to be re-cut. Not everyone will accept that Joe Smith is the same person as Joseph T. Smith.)
There will be volumes of papers to sign, and your attorney will explain what they are. At this point he/she should be very familiar with all of the paperwork and will have reviewed and approved anything out of the ordinary.
A closing can be finished in an hour but typically takes longer. If problems come up, some closings can take several hours. The most typical problems that arise at the closing table are negotiations for items that emerged during the walk-through or waiting for funds to clear, and your attorney is there to guide you.
You may not realize that the closing is over until someone hands you a set of keys.
Congratulations, you are the owner of your new home!
Note: The 10-Steps in your deal may need to be taken in a slightly different order, and many steps may even overlap. This Buyer’s Guide is for informational purposes. We urge you to get professional legal advice to assist you in the buying process.